The cost of reproduction, new, has been variously interpreted, sometimes erroneously, especially when it has been held to mean a system identical with the one the valuation of which is under consideration. Properly, it should be understood as a plant of similar character and equal efficiency. . . .

It will depend upon conditions as to whether the cost of reproduction, new, and the original cost vary materially. One of the principal differences which will be found will be in the size and capacity and number of units in the two cases. Gas plants are probably never built in a single year, nor used exactly as they were originally constructed for a number of years. The original cost will probably properly cover the plants as installed with small units, while the cost of reproduction, new, may be considered to cover only the cost of a smaller number of much larger units having the same aggregate capacity. Especially would this difference arise in connection with the distribution system, both mains and services. Originally one single main, on one side of the street, and of comparatively small size, may have been adequate to provide gas service in that particular vicinity. Later on it becomes necessary to lay an additional gas main many times larger than the original; and, as is often the case, this later main is laid upon the opposite side of the street, resulting in the cutting of all services leading to property on the side of the street where the new main is laid and the connection of those services into the new main instead of the old. As viewed from present requirements, one gas main alone might be considered in obtaining the cost of reproduction, new, while the actual cost would necessarily be greater.

§ 81. Cost under present or original conditions.

3. Cost of reproduction may mean: (a) the cost at present prices of land, labor and materials of reproducing the existing plant under present or hypothetical conditions, or (b) the cost at present prices of land, labor and materials of reproducing the existing plant under the actual conditions under which the existing plant was originally constructed.

§ 82. Present or original conditions-Discussion before American Society of Civil Engineers, 1911.

These two conceptions of what is meant by the term "cost of reproduction" were brought out in the discussion before the American Society of Civil Engineers of the paper on "The Going Value of Water-Works," by Leonard Metcalf and John W. Alvord. 10 The paper discussed contemplates the use of the cost of reproduction method. Halbert P. Gillette, in discussing the paper, contends that actual cost rather than reproduction cost should govern, saying (at page 382):

Adopting, as the writer does, the first premise, namely, that a public service corporation is entitled to a fair return on its investment and for its managerial services, most of the perplexities confronting an appraiser vanish. It follows logically that the appraiser must base his appraisal on the actual conditions under which the property was built and operated. If trees were cleared, then he must allow for the cost of clearing, although not a tree may now be standing. If streets were graded, then that grading must be estimated, though to-day the entire city is as level as a floor. If quicksand was encountered in laying a pipe-line, then the added cost of excavating it must be allowed, even though subsequent works have drained the line so that it no longer has a yard of quicksand. If money was spent to educate the public to the use of the commodity sold by the corporation, then that money is a development expense which must be allowed, even though the expense would not now be incurred by a new corporation of like character. If the corporation has built railway lines to develop a country, and has not only spent money to get people to settle there, but has experienced deficits below a fair return on its investment until the country has become sufficiently populated, then this development expense must be allowed. In brief, the entire history of the public utility must come within the appraiser's knowledge and consideration.

10 Published in the Transactions of the Society, 1911, Vol. 73, pp. 326, 382, 388.

In reply, the authors, Messrs. Metcalf and Alvord, state that Mr. Gillette has misinterpreted the reconstruction cost method and that that method as applied by the courts does not involve the determination of the reproduction cost of an equally efficient plant, but the reproduction cost of the existing plant reproduced under the conditions existing at the time the property was actually constructed. They say (at page 388):

In this he is wholly wrong, if he is seeking to interpret the actual views of the writers, for the Courts have clearly laid down the rule that the existing property shall be valued, and not an equally efficient plant. . . Without going into detail, it is perhaps sufficient to state that, in a recent joint valuation by the authors, the very elements which Mr. Gillette says should be included in valuation, and could not be included under the reproduction cost theory, were included by the writers, as, for instance, the removal of heavy earth embankments, the existence of which cannot be wholly traced to-day; the removal of trees; and the removal of houses and buildings. The writers conceive that the past history of the works and of their construction is of the utmost importance to the appraiser, if he would render fair judgment on the value. of the property.

§ 83. Present or original conditions-St. Louis Public Service Commission, 1911.

The report of the St. Louis Public Service Commission on Rates for Electric Light and Power, made on February 17, 1911, states that, in determining cost of reproduction for rate purposes, the Commission has taken into consideration the actual conditions under which the property has been created. The Commission says:

11

As presented by the Company, the theory of the Cost of Reproduction New means that the value upon which it should

11 At pp. 20, 21, 29.

be permitted to earn a fair return should be the estimated cost of reproducing at the present time, the property as it now exists.

At first sight this may appear reasonable, provided the estimates are reasonable. In fact the theory is probably as good as many of the various theories advanced for arriving at an estimate of Earning Value, but there are so many and various elements and conditions to be considered in the valuation of a large public service property that a strict adherence to any set theory is likely to produce results which are manifestly unreasonable and unjust.

Table VII sets forth the Company's estimate of the Earning Value of its property according to the theory of Cost of Reproduction New. Some of the items entering into this Table are based upon costs as produced under conditions existing in the actual construction of the present property, while other items are based upon purely hypothetical conditions of reproduction.

The theory of this presentation of Earning Value is rejected by the Commission on the ground that it disregards the actual conditions under which the property was produced, and sets up a purely hypothetical case which is not analogous to the one under consideration.

The aim of the Commission in determining the Earning Value of the property of the Union Electric Light and Power Company, has been to arrive at a fair and reasonable present value of the property in the service of the public at the date of this investigation.

The theory or rather method by which the Commission has arrived at its final figures differs essentially from the theory of Cost of Reproduction New, as used by the Company, in that the Commission has taken into consideration the actual conditions under which the property has been created, while the Company, as stated before, has assumed a hypothetical set of conditions. The Commission believes its own method to be much the better one for arriving at results calculated to do justice to all parties concerned. In the major item of value, viz: the construction cost, there can be no dispute as

to method, as a great part of the property has been recently completed, and in the older parts, through lack of reliable data for old costs, the Commission's engineers have been compelled to a great extent, to use present prices. In fact it has been agreed between the Commission and the Company that the cost prices used are applicable to either theory.

In assigning costs or values to elements other than construction or those dependent directly on construction, the Commission has endeavored to arrive at figures which will represent fairly what those costs should have been under all the existing conditions.

§ 84. Present or original conditions-Conclusion.

The treatment of pavement over mains laid at the expense of the city, 12 of piecemeal construction, 13 of overhead charges,11 and of various other elements of valuation depends upon which of the above methods 15 are adopted. Considered from all points of view the method of reproducing the existing plant under the actual physical and other conditions under which it was actually constructed seems fair to both parties. It is a rule that corresponds to the actual equities of the parties while the other rule gives an unfair advantage in some cases to the public and in other cases to the company.

12 See § 169. 13 See § 362.

14 See § 240.

15 See § 81.